NASAA pressures SEC to preserve regulatory turf of state government bureaucrats

The public notice and comment process that precedes the adoption of new capital markets regulation is ordinarily a rather mundane affair in which attorneys, academics and market participants steeped in the technical facets of capital market regulation present their views to the SEC -- except of course when the rulemaking involves the regulatory turf of state government bureaucrats bent on taxing capital formation.  Currently, these bureaucrats are exerting political pressure on the SEC to derail the adoption of sensible regulations that would implement a key provision of the bipartisan Jumpstart Our Business Startups Act (JOBS Act), commonly known as Regulation A+, that once implemented will facilitate capital formation by small and emerging growth companies.

The JOBS Act Regulation A+ provisions are intended to reduce the regulatory compliance burden for public offerings of up to $50 million.  With the reduced compliance burden, companies will be able to raise capital more efficiently and at a lower cost and hopefully grow their businesses and create jobs.  Who are these bureaucrats and why do they seek to throw a monkey wrench into the SEC’s implementation of such sensible regulations?  They are the state securities regulators, often referred “Blue Sky” regulators, represented by their trade association, the North American Securities Administrators Association, and the simple reason as to why they are doing this is that they seek to preserve regulatory power to regulate Regulation A+ offerings.   

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These regulators are simply stuck back in time with a regulatory mindset developed over 100 years ago.  The first Blue Sky laws were enacted in 1911, at a time when the principal mode of interstate travel was the railroad and the Bell operating companies had yet to install a coast-to-coast telephone line.  State regulation in that era made sense given that the pool of accessible capital was predominantly local.  Today, we travel by jet and live in an economy where investors and companies can easily communicate with each other through the internet and mobile telephony providing companies with access to capital across state borders.  The Blue Sky regulators fail to grasp this reality and would rather advance a balkanized system of regulation under which companies must comply with the regulations of 50 different state regulators.

The SEC has proposed sensible regulations which will allow small and emerging growth companies to execute offerings seamlessly while adhering to a substantially reduced disclosure burden.  However, to make this new offering regime viable, the SEC has appropriately proposed to preempt the application of state Blue Sky regulations.  NASAA and its members have criticized the SEC for what they believe is an anti-investor proposal.  This argument that the SEC is undermining investor protection is nothing but a “red herring.”

The SEC’s proposal does not impact the states’ enforcement authority to investigate and prosecute fraud and abuse.  Every Regulation A+ offering will be subject to review by the SEC’s professional staff.  NASAA fails to explain why a duplicative review is necessary and instead just makes the conclusory assertion that without such state-level review the risk of fraud and abuse with increase.  NASAA’s assertion is disingenuous; the states will be able to investigate concerns over fraud and abuse, take enforcement action and communicate their concerns to the SEC.

NASAA notes that their members have developed a coordinated review program under which the states would appoint two lead examiners; one for the group of states that regulate disclosure and the other for the states that regulate the merits of the offering.  Such coordinated review does not address the fact that the offerings would still be subject to the jurisdiction and policies of 50 state regulators.  There is also the risk that the merit regulators will not like the terms of the offering and will preclude companies from offering their securities in their states.  NASAA also completely glosses over the fact that nation-wide public offerings require the payment of filing fees in all 50 states, a direct tax on capital formation. 

The stakes are high, as NASAA and its members have put political pressure on the SEC to preserve their regulatory turf.  Without preemption, the modernized offering regulation developed by the SEC will be for naught since the compliance costs associated with state regulation will dissuade companies from taking advantage of the new regulations.  This would be unfortunate for companies and jobless Americans alike.  The SEC should stand up to these bureaucrats and not bow to the political pressure.

Zuppone is a partner at Paul Hastings LLP and chair of its Securities & Capital Markets practice.